NAB’s Bitcoin ban a symptom of the digital currency threat

analysis Virtual currency Bitcoin is not a subject that ever draws neutral reactions. Against those who see the radical possibilities of a frictionless payment system designed for the internet, there is a growing resistance to the currencies that threaten existing business models and the perceived traceability of our current currency systems.

Leading the resistance against digital currencies are the banks, with the latest recruit to these ranks, Australian bank NAB, closing accounts of customers whose businesses are engaged in exchanging cryptocurrencies.

An Australian trader operating through LocalBitcoins.com and an another Australian Bitcoin exchange CoinJar have received letters from NAB informing them that: “… digital currency providers pose an unacceptable level of risk, both to our business and reputation.”

NAB joins banks in China such as the Agricultural Bank of China, that has moved to freeze the accounts of one of China’s larger Bitcoin exchanges, BtcTrade. Likewise, banks in Canada have already largely blocked accounts used for companies trading cryptocurrencies.

It is easy to point to the recent failure of Bitcoin exchange Mt Gox and the subsequent law suits that have embroiled Japanese bank Mizhuo, as a catalyst for NAB’s move. But if banks refused to service businesses after one or more of their kind went bust, they would not be left with very many clients. The risk assessed was also not one based on the companies involved, their operations or their clients, it was simply a matter of the business they were in.

While moves by banks to manage risk is something most customers would welcome, the global financial crisis showed us banks’ views of risk are highly selective and largely determined by the other part of this equation: the rewards. In terms of cryptocurrencies, the rewards to banks at present are very low. This is especially the case for a currency that is designed to largely cut them out of the picture.

Bitcoin and other digital currencies are designed to be exchanged directly between senders and receivers. This means that currently, transaction costs and bank fees can be avoided, so banks’ enthusiasm for supporting this industry or promoting it would be tepid at best. The real risk to banks is perhaps then not that posed by customers using accounts to enable Bitcoin exchanges, but the threat to their bottom line.

NAB’s own senior currency analyst Emma Lawson has argued Bitcoin has many of the characteristics of regular currency, and that its potential to become a successful payment system it contingent on people’s continued belief in it. Clearly something that banks aren’t yet willing to see happen.

If banks are asked to justify their decisions purely on risk, they are likely to point to Bitcoin’s association with criminal activities. The rhetoric here has recently stepped up with the European police chief claiming we’re just seeing the beginning of Bitcoin’s use by criminal organisations.

Other than the clear use of Bitcoin as the payment system of illegal websites such as Silk Road), the use of cryptocurrencies as a proportion of the total value of money involved in crime is probably tiny. The United Nations Office on Drugs and Crime estimates that in 2009 the total amount of money involved in global criminal activity was US$2.1 trillion. The total market capitilisation of all cryptocurrencies is currently less than US$10 billion.

Cryptocurrencies may appear to be ideally suited to money laundering, but the problem is they eventually have to be exchanged for real currency, which immediately causes problems if you are trying to move large amounts of money. The second issue is the extremely volatile value of such currencies. There is a large risk that money with a certain value ends up being worth a lot less by the time it has been laundered and converted into a currency that can be actually put to some use.

Of the U$2.1 trillion that is involved annually in global criminal activity, most, if not all, will pass through banks at some point, and not surprisingly, will drive revenue for those banks. The idea then that digital currencies pose a larger theoretical threat seems somewhat absurd in comparison to the very real crime involving real currency.

Governments around the world have moved to deal with the lack of regulations on Bitcoin by either banning the currency outright, as in Thailand, or practising “masterly inactivity”, essentially delaying making any moves that might legitimise digital currencies and the industries that would then arise around them.

In this regulatory vacuum, banks have been able to protect themselves against the threat of the bankless payment system that digital currencies represent.

Bitcoin will probably never replace national currencies and I honestly don’t beleive people should expect it to.

What bitcoin does (very well I might add), is offer a quick, very cheap, easy way to send small sums of value (money) from one person to another.

At the moment, if you log onto a newspaper website with paywall, it’s “pay $5+ a month to sign up or go away”. Because charging anything less than $5 results in a too large proportion of the fee being eaten up in transaction costs.

Bitcoin makes it possible for that same newspaper to charge 10-20-30c for an article as the Bitcoin transaction fees are comparitively tiny compared to regular bank fees.

This opens up a whole new world of micro-transactions on the web that previously were uncommercial due to bank fees.

When you stop looking at it as a threat to the traditional currencies and start looking at it as a cheap way to handle micro-transactions, then you will see Bitcoin indeed is a worthwhile invention and has it’s uses.

> Bitcoin will probably never replace national currencies and I honestly don’t beleive people should expect it to.

Direct bank transfers in Australia are free, and near instantaneous. Currently bitcoin is competing on price, and it can’t compete with that. Once the bitcoin ecosystem has a decade or two of maturity under its belt it probably will be able to out compete the Australian banking system on convenience, but that’s a long way off. I wouldn’t use the term “never”, but “won’t replace cash in Australia for the foreseeable future” is reasonable.

Not surprisingly bitcoin usage has started with the low hanging fruit, which means any transaction that is hard to do with normal currency. The lowest hanging fruit was apparently illegal purchases on the internet. My guess is it has a near monopoly on that. Since it works wonderfully well with a mobile phone I can see it taking off in failed states where a Australia’s wonderful banking infrastructure is just a remote dream. Oddly the US almost falls into that category because it’s fractured banking system makes it difficult to transfer money outside of the local area. They still rely on cheques with the associated fees and risks.

And even in Australia, right now, it’s cheaper to do a one off international transfer at around the $1000 mark using a one-off bitcoin transaction than using the banking system. Most of that cost is soaked up in buying & selling the bitcoin. The core bitcoin transfer itself costs around 1/2 a cent. Small scale international wire transfers look to be ripe for the picking, as they are expensive and the user has to bear the risk.

I think bitcoin usage will evolve a bit like solar power. There won’t be any sudden migration. Rather it will spring up like a weed where ever the conditions are favourable. And each time it does colonise an area it makes conditions more favourable for itself in other areas.

Again Australia with the “slow follower” routine. The biggest bank in Korea by contrast are the ones who funded Bitcoin startups there. I guess Aussies can always just buy the future of money from the Koreans, hey it worked for cars, TVs, and computers didn’t it?

Of course, it’s interesting to review the history of banks and banking.

Banking was started originally (back in the 1500-1600s) as a repository for merchants profits, when they got tired of pulling large cartloads of cash around. Even in those days, fees were charged against the accounts, over and above the interest generated when the bankers themselves used clients’ money to invest…

While we’re here, consider the requirements for currency media. The Noble Metals are still the best bet, but only BitCoin will tick ALL the boxes. Scary, eh?

Banking was never a low-enough-cost option for the plebs. You needed significantly more than 12 pence per week to make bankers’ services profitable to your pocket.

The reality today is that banks are still an expensive luxury for the average wage-earner. We happily pay the fees to obtain some protection from common thievery, and some ease in buying currency to pay for goods we cannot be bothered saving for, but we choose to ignore the fact that our cash is better off under our mattress. (Yes, BUYING currency. NOT borrowing currency.)

And then the Federal government realised it could directly control our financial lives by simply assuming that we all have bank accounts, and Social Services/Centrelink would no longer issue cash or cheques.

Of course the NAB has a problem with BitCoin! BitCoin uses virtual banks, has very few fees, even fewer overheads, and when matured will drive bricks-and-mortar banks out of business. Even the plebeian class will be able to afford banks then. It is that simple.

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